flows. Today, setting up the proper language: National Income Accounts ...
Current Account Balance+Financial Account Balance+Capital Account.
Balance40.
The Balance of Payments Costas Arkolakis teaching assistant: Yijia Lu Economics 407, Yale
January 2011
Motivation: International Economics
Study large-scale economic problems in inderdependent countries Dependence through trade and capital ‡ows International Finance mostly interested in the second whereas international trade in the …rst
This class will study important large-scale economic problems Focus on capital ‡ows, but need to be understood in conjuction with trade ‡ows Today, setting up the proper language: National Income Accounts
Balance of Payments Accounting
Balance of Payment: records a country’s international transactions Current Account Financial Account Capital Account
Balance of Payments
Balance of Payment Current Account Balance+Financial Account Balance+Capital Account Balance=0 Fundamental balance of payments identity An implication of the double-entry book-keeping methodology Example of double-entry methodology: An export transaction is recorded in 2 countries (once with plus –export– and once with a minus –import–)
Balance of Payments Accounting
Balance of Payment: records a country’s international transactions Current Account: trade balance and income from abroad (Exports-Imports+International income receipts-payments to foreigners) (e.g. Japanese TV imported)
Financial Account: sales of assets Sales of assets to foreigners-purchases of assets located abroad (e.g. purchasing a residence abroad)
Capital Account: capital transfers (e.g. charity gifts)
Current Account
Trade Balance Merchandise: exports - imports of goods Services: exports - imports of services
Income Balance Net investment income: net income receipts from assets Net international compensation to employees: net compensation of employees
Net Unilateral Transfers Gifts from foreign countries minus gifts to foreign countries
Current Account: Examples (from the perspective of the US)
Trade Balance Merchandise: imports of Nokia phones from Finland (-) export of ipods to France (+) Services: Drinks in Paris Bar (-) German tourist watching Broadway (+)
Income Balance Fage yogurts US subsidiary makes pro…ts and rebates them to Greece (-) Dividends for US Bondholders of German stocks (+)
Net Unilateral Transfers Charity gift to Haiti (-) Greek sends money to relative in the US (+)
Current Account Current Account Figure: US Current Account, 2007. Source Bureau of Economic Analysis
Current Account and Trade Balance
Figure: Trade Balance and Current Account as a Fraction of GDP. Source, IMF
Financial Account Di¤erences between sales of assets to foreigners and purchases of assets held abroad US government assets abroad, US private assets (direct investment, securities etc)
Capital Account Capital transfers that result in a change in the stock of assets mostly capital transfers (e.g. debt forgiveness) other minor items non-…nancial non-produced (eg. copyrights etc)
National Accounting GDP=Gross National Expenditure + Trade Balance
National Accounting GDP=Gross National Expenditure + Trade Balance GNI (Gross National Income)=GDP+Income Balance
National Accounting GDP=Gross National Expenditure + Trade Balance GNI (Gross National Income)=GDP+Income Balance GNDI (Gross National Disposable Income)=GNI+Net Unil. Transfers
National Accounting and Current Account GDP=Gross National Expenditure + Trade Balance GNI (Gross National Income)=GDP+Income Balance GNDI (Gross National Disposable Income)=GNI+Net Unil. Transfers GNDI=C+I+G+CA =) National Saving=S GNDI-C-G=I+CA Thus S=I+CA so that if CA>0 (CA Surplus) () S>I
Current Account and Saving CA Surplus means the country saves more than investment needs CA De…cits means that it saves less than investment needs Wealth decreases Analogy to household
Non-zero CA implies changes in the Net International Investment Position (NIIP) of a Country NIIP=foreign assets owned by US residents - US assets owned by foreigners CA is a ‡ow, NIIP is a stock. Thus, CA=∆NIIP
CA and NIIP for the US A dramatic change in the NIIP of the US Fueled by large imports from China etc Suprisingly, it could be much more than that if the value of US owned domestic assets did not appreciate so much!
CA and NIIP for the US A dramatic change in the NIIP of the US In the past, many cases of large CA de…cits proved not sustainable In fact, cases like Asian countries in 80s, Latin American countries in 90s experience large reversals in the international capital ‡ows
Vivid debate of whether the US CA de…cit is sustainable Of the increase in CA de…cit reveals increasing discrepancy between S,I
Global Imbalances over time Figure: Current Account Imbalances. Source Feenstra and Taylor, International Macroeconomics, 2010
Global Imbalances over time Figure: Current Account, Saving and Investment as a Fraction of GDP. Source: Feenstra and Taylor 2010.
